Partnership Tax Services

Under English partnership law, it is possible to set up a range of different types of partnerships, such as general partnerships, limited liability partnerships (“LLP”), and limited partnerships (“LP”). The general idea behind partnerships is that they are transparent and open regarding how they are taxed in the UK. However, anti-avoidance laws introduced in recent years have brought about significant changes in the taxation of partnerships to curb what is considered widespread exploitation.

Partnerships have been used for years as flexible business vehicles for ventures, mainly when they include several highly talented entrepreneurs since arrangements allow individuals to be brought into, depart, or alter their interests in the partnership without substantial tax complications (unlike directors or workers who must purchase or transfer of company shares). Partnership profits are taxed at a lower rate than amounts received as employment bonuses or dividends from a limited company because there is only one taxation of profits and no employer’s national insurance payments (NICs). The flexibility and tax effectiveness of partnerships come with unlimited liability for individuals. However, establishing limited liability partnerships (LLPs) brought about a shift in this approach. 

A limited liability partnership (LLP) is not a form of partnership, and the laws that govern partnerships do not apply to LLPs either. However, the Limited Liability Partnerships Act of 2000 made LLPs legal in 2001. LLP is not a limited company; it’s a separate form of the corporate body. Similar to a company, a limited liability partnership (LLP) is a separate legal entity from its members, who are referred to as “members” of the LLP. It is essential to differentiate between a “limited liability partnership” and a “limited partnership,” as the two terms have entirely different meanings. Since 1907, the United Kingdom has been home to a particular type of partnership known as a limited partnership. They have been utilised in investment fund structures but are not frequently used as business vehicles since they do not let their limited partners have limited liability while simultaneously participating in the administration of the business.

A limited liability partnership (LLP) is legally constituted after it has been registered with the Registrar of Companies. Therefore, the procedures that must be followed to establish an LLP are not too complicated.

• Unlike a company, a limited liability partnership (LLP) does not have shares, nor does it have shareholders; in addition, it does not have directors; instead, it only has members.
• Unlike a company, a limited liability partnership (LLP) does not have to file articles of association with the Registrar of Companies. Instead, members will typically sign a members’ agreement (setting out their rights and duties), but that is a confidential document that does not need to be listed on any public register.
• LLP members have the same safeguards as company directors and shareholders regarding liability. A member of an LLP is generally protected from financial responsibility for losses suffered by others due to the actions of other members or workers or as a result of the collapse of the business. However, members may be held accountable for losses generated by their defaults.
• While limited liability partnerships (LLPs) are subject to the same insolvency system as companies, members of LLPs are significantly more at risk than directors or shareholders of a corporation due to unique “clawback” protections.
• An LLP, like a company, must generate and submit annual financial statements that comply with UK GAAP or International Accounting Standards.
• A limited liability company (LLP) operates similarly to a standard partnership with regard to taxes. The members of an LLP are each considered self-employed taxpayers for tax reasons and must pay taxes on their proportionate share of the partnership’s earnings (whether or not those profits are distributed to the members).
• Adding a new member or adjusting the distribution of shares among existing members shouldn’t result in tax liability. Compared to the severe tax complications that arise when a company gives shares of its stock to its directors or workers, this is a favourable alternative.

Property or land owned by a partnership/LLP is treated as joint property – it is co-owned by the partners rather than owned directly by the partnership. If a property is sold, the proceeds are split between the partners according to the partnership agreement and each partner pays Capital Gains Tax on their share of any gain. Any rental income is treated as taxable trading income of the partnership/LLP.

No, family relationships alone do not automatically make someone a partner/member for tax purposes. There must be evidence of a genuine partnership/LLP including business activity, profit sharing, joint control, and intention to be in business together. Otherwise, family members should be paid a salary or arm’s length fees for any services provided to avoid tax complications.

Yes, partners/LLP members can take a salary which is an allowable expense for the partnership/LLP and taxable employment income for the individual partner with PAYE/NICs applicable. The salary must be commercially justifiable based on the work performed and at a similar level to other employees.